Monday, November 26, 2007

Oh so extravagent....

Andrew Sullivan does not like Social Security, but that does not give him the right to be uninfomred in arguing for its demise today:

Not a total guarantee that the gold-plated benefits of the late-century will keep growing and growing. And not a peg to wages rather than prices, linking retirees to current wage-earners rather than actual needs. I agree with Amy that the obvious, simplest reform to keep social security solvent is to remove the peg to wages, and keep it indexed solely to price inflation.

Via the 2003 CBO report, the following chart shows projected replacement rates of the first year of retirement income for different ages of retirement over the next seventy years or so. Remember that the three different age levels and their different respective rates aim to provide the same acturial earning levels [get more if you start collecting later/older; get less if you retire/collect early]. Ooohhh --- 40% wage replacement is now 'gold plated.' Yes, the replacement rate for very poor individuals is signifcantly above this; up to 90% for people whose AIME is less than $8,600/year but it is not just to harm the worst off in order to balance a budget. The American who has a lifetime of earning exactly the wage index amount, who retires today at normal retirement age, will see a 44% replacement rate. That number will decrease in the future according to the current schedule.

Kevin Drum notes the size of the benefit under current law and under the proposed law that Andrew Sullivan supports because Sullivan believe's today's benefit is extravagant:

That's $881 per month. There are lots of things you can call that, but "gold plated" isn't one of them.

Oh, and one other thing. The average benefit in 1960 was $981. If benefits had increased since then only at the rate of price inflation, today's benefit would be $6,680. Subtract the Medicare premium and divide by 12 and the monthly benefit works out to $435.

On a personal note, my parents' retirements are in decent shape because my dad has a union pension in a very well funded union controlled pension trust that is legally segregated from any single company's ability to pillage it, so Social Security is not the only thing standing in the way of my parents moving in with me or any of my siblings due to destitution in their old(er) age. However not everyone is so lucky, and having a reliable, fully transportable, non-exposed to systemic risk defined benefit pension that replaces between 33% to ~40% of pre-retirement income is not 'gold plated.'

There is a place for retirement income that is held at some degree of investment risk, at some degree of systemic risk, and at some degree of potential information asymetry risk, but that level of income is, or at least should be, past the basic levels needed to feed, clothe and shelter oneself.